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8/25/2010 @ 6:59PM5,367 views

Five Reasons Branded Drug Prices Will Keep Rising

The AARP is out with its annual survey showing that the prices of commonly used branded drugs increased. This year those prices, measured at retail, rose 8% even though inflation was negative. Why is anyone surprised? Prices for branded drugs always rise in our health care system. Here’s why.

People don’t want to switch medicines. If Lipitor lowers your cholesterol effectively with no side effects, you’re not going to want to try Crestor because it’s a little cheaper — even though it’s more potent. If Pfizer boosts Lipitor’s price, the financial loss due to people stopping treatment or taking another drug is far outweighed by the extra cash from people who stay. This is why Viagra’s U.S. dollar sales increased 21% since 2006, a period in which prescriptions decreased 13%.

Brands can’t compete with generics. If a cheaper knockoff version is available, it rarely pays to get in a price war. Instead, raise your price to hold onto as much money as you can from people who believe (usually wrongly) that the brand is better. You don’t have very long before more generics enter the market, causing the price to fall to a small fraction of what you originally charged. This seems to be what happened with AARP’s worst offender, Flomax from Boehringer Ingelheim.

Pharma must make hay while the sun shines. Drugs are only protected by patents for a limited time, and the risk that a generic company will find a legal way to invalidate a patent and introduce a generic ahead of schedule. If a medicine is selling, raising the price is a necessity. By the same token, it makes sense to start off cheap to grab market share early, and then raise the price.

Branded drugs are increasingly niche products. Most people take a generic. According to IMS, 81% of drug sales in 2009 were for brands for which a generic existed, up from 61% of the time 2003. Ninety-two percent of the time, patients get the generic. In order to try and sustain themselves, drug companies are naturally moving to higher priced areas, like antipsychotics.

Being expensive is the secret to success. There has not been a big mass-market blockbuster launch since Merck started selling its diabetes drug Januvia in 2006. Instead, the trend has been for cancer drugs that cost as much as $100,000 per patient, like Eli Lilly’s Erbitux or Dendreon’s Provenge. A lot of the biggest successes, like Solaris from Alexion and Elaprase from Shire, cost several hundred thousand dollars per year.

When AARP trumpets that “All but six of the 217 brand name prescription drugs studied by AARP had retail price increases exceeding general inflation last year. Each of the top 25-selling brand name drugs had price increases, with most jumping more than five percent,” an informed reader should reply, “Of course.”

If we want things to be different, we need to change the way we set prices — or impose price controls, which exist in other countries. In many parts of the world, truly cheap generic alternatives don’t exist. This kind of generic system does not exist in many other countries. That’s why Deutsche Bank estimates that in 2014, long after patents expire, Lipitor will still generate $3.5 billion in annual sales, about a third of its current total.

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